Advertising: A market in transition

The advertising industry is in the midst of a digital revolution as its clients follow their customers and shift resources to the web and new forms of interactive advertising emerge.To facilitate these changes, companies like Google, Yahoo! and smaller startups like OpenX, provide the digital advertising technology that businesses need to manage and maximise their ad revenues.

The scale of these new operations is truly enormous. For example OpenX’s ad serving products are used by more than 200,000 websites and serve more than 350bn ads monthly. In total the OpenX Market - an online exchange - reaches more than 400m monthly unique users worldwide.

To understand more about how the advertising market has changed – and what the future might look like - I sat down with Tim Cadogan, OpenX’s chief executive, who spent five years at Yahoo!, most recently as senior vice president of Global Advertising Marketplaces - before joining OpenX.

Below is an edited version of our conversation:

How has the advertising market changed over the past five years?

One of the most significant trends in the overall advertising market has obviously been the increasing growth of online advertising. The growth has been striking, with Internet advertising revenue now ranking second only to television when compared to all other ad-supported media. It’s also worth noting that in 2010 online advertising revenue surpassed newspaper ad revenue for the first time.

What proportion of advertising is now online and what are the trends?

Online advertising revenue has grown from nothing in 1995 to $26bn in 2010 and now represents approximately 15 per cent of total ad-supported media in the US.

According to the 2010 Internet Advertising Revenue Report produced by the Interactive Advertising Bureau (IAB),search remains the largest online advertising revenue format, accounting for 46 per cent of 2010 revenues. Search totaled $12bn, up 12 per cent from 2009.

But it is the growth of display (non-search) advertising that has been strongest over the last year or so. Again according to the IAB, display-related advertising totaled $9.9bn or 38 per cent of 2010 online ad revenue. Most significantly, the display category grew at a 24 per cent year-over-year rate, twice that of search.

OpenX has two main businesses, tell me about each of them.

We do have two primary businesses that should be considered in tandem because in actuality they form one single platform.

OpenX Enterprise is our new Software-as-a-Service (SaaS) digital ad serving technology product for large publishers. This innovative technology enables publishers to maximise ad revenue in an increasingly complicated ad landscape. Today many publishers find revenue management inefficient and complex because they have to utilise different tools to manage different revenue channels. For example, they may sell advertising inventory through a direct sales force or sell it indirectly through ad networks and other supply aggregators. In contrast, OpenX’s new platform enables publishers to manage all these ad revenue channels in one place, much like portfolio management.

OpenX Market is our online ad exchange. It is a real-time marketplace where publishers offer their ad space (inventory) and advertisers, agencies and other buyers of digital ad space bid on that inventory in a real-time auction. The exchange has grown dramatically since launch with between 8bn and10bn bids daily.

Together, OpenX Enterprise and OpenX Market provide a comprehensive revenue serving platform by combining innovative ad serving technology with a unique ad exchange. We believe this approach to online advertising - enabling publishers to maximise yield across all their ad revenue channels in real-time in a single platform - is truly a paradigm-shift for the industry.

It’s also one key reason we’ve become the leading independent provider of digital advertising technology, serving thousands of customers such as Groupon.

How does the exchange part of the business work? Is it analogous to other types of exchanges?

Our exchange – OpenX Market - is analogous to a traditional stock exchange. It’s quite literally a marketplace where buyers and sellers meet. Instead of stocks, however, buyers/advertisers and sellers/publishers are trading online ad space, also known as ad inventory.

Aggregating and structuring historically fragmented inventory is an important way that the Market helps transform online advertising and significantly benefits both publishers and advertisers. The exchange enables publishers to maximise their advertising revenue by selling their inventory in a simple to use marketplace where all classes of buyers bid for each impression in a real-time auction. The Market also enables buyers to define and buy ad inventory based on their unique criteria across an enormous pool of diverse, primary inventory.

OpenX Market clearly seems to be filling an important need. Last year, OpenX’s exchange-generated revenue grew by more than 600 per cent and we expect similar growth this year.

Google has established itself as a dominant force in online advertising. Do you expect the market to consolidate over time around a few big integrated players?

Although it’s true that one player has become dominant in search advertising, it’s especially important to understand that no company has yet established a dominant position in display. Given that some commentators have suggested that the display market could grow to $200bn dollars, several companies, including OpenX, are seizing this opportunity to innovate and rapidly transform the space so that it becomes more efficient – and generates significantly more revenue – for both publishers and advertisers.

In fact, it’s the clear desire for choice and an alternative to a single dominant company, along of course with the excellence of OpenX’s products and team, that we think accounts for our rapid growth. In just three years, OpenX’s revenue has grown from literally zero to a run rate of more than $100m annually.

What role do you think ad agencies will play in a digital advertising future?

Although the automation of ad buying in the display space might seem to point to more direct relationship between advertiser and publishers and perhaps agency disintermediation, we believe the role of the digital agency will become increasingly important to marketers as real-time bidding evolves. The expertise at agencies, particularly their trading desks, around the use of buy-side technology tools, vendors and data is not easy to incubate or replicate, and the needs of a particular advertiser often require different combinations of partners. The rise of mobile and video will make this even more complex.

In addition, agencies that can aggregate big pools of spend are still in a unique position to foster direct relationships with digital publishers. Moreover, the need for creative development and optimisation plus planning still exists, which will not likely be managed effectively at the brand level in the short term. At OpenX, we believe our role as a large publisher platform is to facilitate those relationships.

Where do you see the main opportunities for growth?

We think there are several key opportunities for growth in the space, including in particular mobile and video. The growth will be set against the backdrop of a rapidly growing display market, both in the US and globally.

At OpenX, we expect growth across the board. OpenX Enterprise will continue to grow in the US and Europe as display becomes ever more critical to online publishers and advertisers alike. Similarly, we expect OpenX Market to continue growing apace as more buyers embrace real-time bidding, since every impression in the exchange is RTB-enabled. We also plan to deliver the ability to monetise all non-guaranteed inventory.

We also plan to continue our international over the coming year; in particular we see enormous opportunities in both Europe and Japan. And there will be much more to come from us in both the mobile and video arenas as we increase our offerings on all digital ad platforms.

How important is mobile advertising in terms of the overall online advertising landscape?

Although it is still in the single digits as a percentage of online advertising spend, mobile advertising is growing rapidly. (Mobile advertising includes smartphones and tablets.)

According to the IAB, which measured this category for the first time in 2010, mobile was estimated to be between $550m and $650m. Many expect that number to double this year to more than $1bn. This growth in mobile is being driven by rapidly changing consumer habits, with smart phones as well as tablets gaining widespread adoption.

At OpenX, we’ve built a mobile capability into our ad technology product and, in just three months since launch, we have quadrupled the amount of mobile impressions we are serving. As a result of this expansion and with additional new functionality in the works, we expect this area of the business to become a big part of the reason publishers work with us.

Do you see the connected or smart TV as a big new market?

Yes, we believe that any connected “screen” (telephone, tablet, laptop, desktop, big screens) used by consumers will generate an important digital ad business. As more televisions become IP-connected and smart, we fully expect ad tech platforms like OpenX to play a key role in monetising them.

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